ISDN HOLDINGS LIMITED
SGX: I07
ISDN Holdings Limited - Rebound In Business Raises Value Proposition
Share price has lagged despite positive developments
- Since 2H 2016, China has enjoyed a rebound in its manufacturing sector with the Caixin Manufacturing PMI first rising above 50 points to 50.6 in July last year and to 51.7 in February.
- Likewise, ISDN’s results have tracked the stronger sentiment with revenue growing by 10% year-on-year in 3Q16 and 30% in 4Q16. The healthy top-line growth has helped to offset lower gross margin, leading PATMI to rebound by 62% to S$2.9m in 4Q16.
- Despite these developments, ISDN’s share price has fallen to S$0.197 since reaching a high of S$0.275 on 10 January before its listing on the HKSE on 12 January.
Beneficiary of stronger demand from semiconductor and infrastructure sectors
- ISDN’s motion control products are also used in the manufacture of semiconductor equipment. These end uses account for about 20% of ISDN’s revenue. In addition, ISDN supplies high end locks and hinges that are used in railway and transportation systems.
- In general, we estimate that revenue from ISDN’s motion control engineering solutions segment will grow by 10% in FY17 and assume 5% revenue growth for the other segments, cumulating in group revenue growth of approximately 9% to S$281.6m in FY17.
FY17F earnings revised higher by 25% to S$8.6m
- However, PATMI is expected to jump by 67% from S$5.2m in FY16 to S$8.6m in FY17 on economies of scale and the absence of IPO expenses of S$3.5m and FX losses of S$0.7m incurred in FY16. The decline in profitability in FY16 was also partially due to a drop in gross margin from 28% in FY15 to 25% as customers resisted higher selling prices.
- We expect gross margin to stabilize at around 25% over our forecast horizon of FY17 to FY18 with revenue growth adding S$5.8m to gross profit in FY17.
- In addition, ISDN only has S$0.4m of IPO expenses to be recorded in FY17, implying a reduction in admin costs by around S$2.5m in FY17 after accounting for cost inflation.
41% of mkt cap backed by net cash
- As of 31 December 2016, ISDN had net cash of S$25.0m. Adding in S$7m of net proceeds from the listing of new shares in Hong Kong, ISDN has about 8.1 cents of net cash per share, equivalent to 41% of its share price of S$0.197 which includes 0.3 cents of dividend payable on 5 June 2017.
- Based on the same peer group as per our November 2016 report, ISDN’s current share price lags its peer group average in terms of P/E, P/B and EV/EBITDA despite its stronger net cash balance sheet. Benchmarking ISDN against the peer average trading multiples, we arrived at a valuation of S$0.319 to S$0.392 (mean of S$0.346).
- To be prudent, we pegged our valuation of ISDN at 14.66x FY17F EPS or at S$0.320 (revised higher from S$0.300 previously) with an Overweight (high-average return / low risk) rating.
Liu Jinshu
NRA Capital Research
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http://www.nracapital.com/
2017-03-29
SGX Stock
Analyst Report
0.320
Up
0.300
